Step 2: Your retirement ‘pay cheque’
Know your options for regular income in retirement
When you’re working it’s reassuring to know there’s money coming in each month. Then retirement happens and it’s up to you to generate income to live on. The good news is you don’t need to give up that stability.
As humans, we’re wired to stick to what we know. It feels familiar and comfortable, but it can help to change our thinking so that our assumptions can match up with reality.
Super is only one part of your retirement income plan. In reality, most people will rely on other sources such as income from other investments like shares or property or the Age Pension.
In this step, we highlight three key sources of retirement income, and we get to the bottom of some popular myths about each one.
1. Income from your super: Account-based pensions or allocated pensions
When you retire, one option is to roll your super over into an account-based pension to provide you with a regular income in retirement. You get to choose how often you receive your income payments, and how much you withdraw each year (provided it meets the minimum withdrawal requirements). You can generally make lump sum withdrawals at any time.
Account-based pensions allow you to take out more money from one year to the next so your income can keep pace with inflation. But this can introduce the risk of running out of money, depending on investment returns and how much you withdraw over time.
This highlights a common misunderstanding about the level of certainty account-based pensions offer. As each payment will draw from your super savings, your payments will generally stop when your savings run out.
2. Lifetime income streams
A lifetime income stream, such as a lifetime annuity, delivers guaranteed regular income payable for life, in return for a lump sum from your super or savings. Our range of annuities give you the option to choose payments that are fixed, or linked to changes in inflation, interest rates or investment markets. Lifetime annuities come with other features too, which you can read about on our website.
Unlike an account-based pension, payments from your lifetime income stream will be made for as long as you live and if you choose, for your spouse’s life. This is how our lifetime income options help protect you from longevity risk in a way many other investments can’t.
A lifetime annuity can work alongside your account-based pension
People often think they must choose between an account-based pension and an annuity. But you don’t have to put all your super or savings into just one or the other. You can put some money towards an annuity, while the rest stays in your super or other investments.
An annuity can provide an additional layer of protection in retirement. With income payments guaranteed for your lifetime you can feel more confident about your retirement spending now.
||Payments generally continue until your investment runs out
||Payments are payable for life
|Easy access to your capital/ability to make partial withdrawals
||While lifetime annuities are designed to be held for life, there is usually a long period based on your life expectancy where you can access a lump sum if your circumstances change. Partial withdrawals are not generally available.
||No – your payments may increase in line with inflation, but generally your capital isn’t protected as you are simply just withdrawing more from your balance
|Option to index payments to inflation
3. Income from The Age Pension
Once you reach Age Pension age you might be eligible for Age Pension payments, plus other benefits. Eligibility for the Age Pension depends on your circumstances and Centrelink’s assets and income tests. You can find out more about Age Pension rates here.
In Australia, we’re lucky to have the Age Pension to fall back on if our retirement savings run out. But the Age Pension alone may not be enough. When we look at cost-of-living estimates in the table below, it’s clear that the full Age Pension entitlement isn’t enough to cover living costs for many retirees.
Association of Superannuation Funds of Australia (ASFA) Retirement Standard figures
||Comfortable lifestyle budget p.a.
||Modest lifestyle budget p.a.
||Age Pension p.a.
|Couples aged around 65
|Single person aged around 65
Other investments to support you in retirement
There are some other investment options that can supplement your income in retirement, such as term deposits, property and shares. All these options come with their own pros and cons, and you can read more about them here.
What we get asked
Q. How will a lifetime annuity affect my Age Pension?
A. Purchasing a lifetime annuity could immediately increase your Age Pension payments. Unlike many investments which are 100% assessable for the assets test, some lifetime annuities are partially exempt.
Only 60% of the amount invested into a Challenger lifetime annuity counts towards the relevant Centrelink/DVA asset test, through to age 84, or for a minimum of five years. From then onwards, only 30% of the purchase price will count.
For the income test, only 60% of your lifetime annuity payments are assessable.
Test your knowledge of step two
One of the best investments you can make for your retirement is taking time to understand your options. Take this mini quiz to review what you’ve learned so far.
Q1. Payments from the majority of account-based pensions will continue after the balance runs out: